(Bloomberg) — Chinese authorities have told major lenders to China Evergrande Group not to expect interest payments on bank loans next week, according to people familiar with the matter. debt restructuring.
The Department of Housing and Urban and Rural Development told banks in a meeting this week that Evergrande will not be able to meet its debt obligations due on Sept. 20, the people said, asking not to be identified as they discuss a private matter. Evergrande is still discussing the possibility of getting renewals and rolling over some loans. The developer will also miss a principal of at least one loan next week, one of the people said.
Evergrande’s inability to repay bank interest is the strongest sign yet of liquidity stress at the world’s most indebted developer, who sits on more than $300 billion in liabilities. The Chinese authorities are already laying the groundwork for debt restructuring and are bringing together accounting and legal experts to examine the group’s finances. With senior leaders in Beijing silent on whether they will let Evergrande creditors incur huge losses, bondholders have priced in a slim chance of rescue.
It’s unclear whether Evergrande, founded by billionaire Hui Ka Yan, plans to pay about $84 million dollars in bond interest due Sept. 23.
The company’s complex web of obligations to banks, bondholders, suppliers and homeowners has become one of the largest sources of financial risk in the world’s second largest economy. Banking and real estate stocks fell after Bloomberg reported the delayed payments.
Evergrande’s debt shrank to 571.8 billion yuan ($89 billion) on June 30, its lowest in five years, according to data collected by Bloomberg. But trade and other payables rose 15% from six months earlier to a record 951.1 billion yuan. The company has received down payments from more than 1.5 million home buyers on properties yet to be completed.
Most of Evergrande’s working capital is now being used to resume construction on existing projects, the housing ministry told bankers, according to a person familiar with the matter.
Evergrande’s failure to meet its obligations in a timely manner has sparked protests across China by homebuyers, private investors and even the developer’s own staff, raising the prospect of social unrest if the real estate giant’s problems spiral out of control. The company said Tuesday that failing to repay debts on time or get creditors to agree to renewals or alternative arrangements could lead to cross-default.
Evergrande and China’s Housing Ministry did not immediately respond to requests for comment.
Uncertainty about Evergrande’s fate has fueled wide swings in its bonds and stocks, with the latter falling 81% this year. The stock fell 5.4% in Hong Kong. Trading in Evergrande’s 5.9% local bond was suspended after prices fell.
The CSI 300 banking index was heading for a third consecutive loss, with a loss of no less than 1.5%. A gauge of real estate shares fell by 2.4%.
Guangdong officials have rejected at least one bailout request from Hui, who owns a majority stake in the developer, a person familiar with the matter said this week.
Bond investors are bracing for missed payments, with some Evergrande notes trading near record lows of about 26 cents on the dollar. Moody’s Investors Service and Fitch Ratings both downgraded Evergrande this month, citing an increasing probability of default.
Whether the sell-off takes the broader credit market down may depend on the company’s ability to buy time from banks. A messy loan default could fuel fears of widespread contagion, something Xi Jinping’s government has been keen to avoid, even as it tightens funding restrictions for overburdened developers and discourages government bailouts.
(Updates with further details in second and seventh paragraph)
More stories like this are available on bloomberg.com
Subscribe now to stay ahead with the most trusted business news source.
©2020 Bloomberg LP